Looking back, it seems December left everyone in the cold. This week, the US Census Bureau finally released their report on retail trade for the last month of the year. Usually the holiday-driven period is a bright spot for the retail sector, but sales in fact fell 1.2% from the prior month which is the largest drop in almost ten years. The government shutdown which delayed the report (and the wages of government employees and contractors) contributed to the decline as did the missing “Santa Claus Rally” leaving equity investors feeling a bit poorer.
While equity markets were lower on the day the report was released, analysts immediately labeled it “old news” and believe it to be an outlier in an otherwise good trend. Retail sales are up 2.3% over the prior year which is slowing from the 4.1% year-over-year pace reported in November. While human economists can employ their subjective reasoning to look past the report and maintain their expectations for Q4 GDP growth, the Atlanta Federal Reserve’s purely quantitative estimate of economic expansion fell on the data release yesterday to 1.5% from the previous reading of 2.7% on February 7th.
From our perspective, while the retail sales report and Atlanta Fed GDPNow both appear as oddities in the data stream, the unmistakable trend is economic slowing. Looking outside the US too, the deceleration is occurring globally amidst the uncertainty. Across the Atlantic, capital expenditures in the UK for 2018 were nearly at zero as Brexit looms slowing full-year GDP growth 1.4% (from above 2% pre-2016 referendum). Germany slowed to 1.5% growth in 2018 and German 10yr government bond yields are barely positive at 0.1%. Japan too has slowed to under 1% GDP growth as the VAT tax increase looms in October 2019.
As we have said many times before, “slow-growth is not no-growth” even though it may feel like it. Slow-growth does mean it is vulnerable to a shock which could tip the balance. Of course, there is such a thing as a good shock too. It would not take much to shock higher, really just clearing away some of the dark clouds of ambiguity that our policy makers have let linger. Clouds cleared and the sun shining could warm up confidence, bolster activity, and keep up growth.